From the Archives: Having Negative Taxable Income Doesn’t Mean the Government Pays You Extra

From the Archives: Having Negative Taxable Income Doesn’t Mean the Government Pays You Extra

It’s a holiday week, so I’m re-publishing popular blog posts from the past. This is one of my favorites, telling the story about the time I was giving a presentation and one of the audience members started arguing with me that a loss that produces negative taxable income would result in a “negative tax liability” as if the tax brackets also run in reverse.

The tax brackets stop at $0 of taxable income — having taxable income below $0 doesn’t mean your tax liability is a negative number or that the government “pays you more money.”

Example:

Joe has adjusted gross income of $20,000. He has 2 kids and files as head of household. His standard deduction (using 2015 numbers) is $9,250. His exemptions total $12,000 ($4,000 x 3 exemptions, one for Joe and one for each of his kids).

The total of his standard deduction and personal exemptions is $21,250, technically giving him taxable income of a negative $1,250.

On his tax return, Joe will show $0 as his taxable income, and $0 of tax owed.

His refund will depend on how much tax was withheld from his pay during the year, and the credits he qualifies for (likely the earned income credit and the additional child tax credit).

The fact that his taxable income was technically a negative number does not make his tax liability a negative number.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”

Contact Info

Contact Dinesen Tax & Accounting, P.C.

Please click the "Services" tab at the top of the page if you are interested in using our services.

Before contacting me with questions about how a blog post relates to your situation, please be aware that I cannot and do not give free tax advice to non-clients by e-mail or by phone.

Disclaimer

The articles on this blog are presented for general informational purposes only. This blog, and any responses to questions posed in the "comments" section of blog posts, should NOT be considered tax advice. Because each taxpayer's situation is unique, you should pay a tax advisor to discuss your unique situation before you make any financial decisions.